Limitation of Damages Clause Doesn’t Bar Trade Secrets, Copyright Claims – IL ND

A Federal district court in Illinois recently addressed the scope of a limitation of damages provision in a dispute over automotive marketing software. The  developer plaintiff in Aculocity, LLC v. Force Marketing Holdings, LLC, 2019 WL 764040 (N.D. Ill. 2019), sued the marketing company defendant for breach of contract – based on the defendant’s failure to pay for plaintiff’s software – and joined statutory copyright and trade secrets claims – based on the allegation that the defendant disclosed plaintiff’s software source code to third parties.

The defendant moved for partial summary judgment that plaintiff’s claimed damages were foreclosed by the contract’s damage limitation provision. The court denied as premature since no discovery had been taken on plaintiff’s claimed damages.

The agreement limited plaintiff’s damages to the total amount the software developer plaintiff was to be paid under the contract and broadly excluded recovery of any “consequential, incidental, indirect, punitive or special damages (including loss of profits, data, business or goodwill).”  The contractual damage limitation broadly applied to all contract, tort, strict liability, breach of warranty and failure of essential purpose claims.

In Illinois, parties can limit remedies and damages for a contractual breach if the agreement provision is unambiguous and doesn’t violate public policy.

Illinois law recognizes a distinction between direct damages and consequential damages. The former, also known as “general damages” are damages that the law presumes flow from the type of wrong complained of.

Consequential damages, by contrast, are losses that do not flow directly and immediately from a defendant’s wrongful act but result indirectly from the act. Whether lost profits are considered direct damages depends on their (the lost profits) degree of foreseeability. In one oft-cited case, Midland Hotel Corp. v. Reuben H. Donnelley Corp., 515 N.E.2d 61, 67 (Ill.1987), the Illinois Supreme Court held that a plaintiff’s lost profits were direct damages where the publisher defendant failed to include plaintiff’s advertisement in a newly published directory.

The District Court in Aculocity found that whether the plaintiff’s lost profits claims were direct damages (and therefore outside the scope of the consequential damages disclaimer) couldn’t be answered at the case’s pleading stage.  And while the contract specifically listed lost profits as an example of barred consequential damages, this disclaimer did not apply to direct lost profits. As a result, the Court denied the defendant’s motion for partial summary judgment on this point. [*3]

The Court also held that the plaintiff’s statutory trade secrets and copyright claims survived summary judgment. The Court noted that the contract’s damage limitation clause spoke only to tort claims and contractual duties. It was silent on whether the limitation applied to statutory claims – claims the court recognized as independent of the contract. [*4] Since the clause didn’t specifically mention statutory causes of action, the Court refused to expand the limitation’s reach to plaintiff’s copyright and trade secrets Complaint counts.

Take-aways:

Aculocity and cases like it provide an interesting discussion of the scope of consequential damage limitations in the context of a lost profits damages claim. While lost profits are often quintessential consequential damages (and therefore defeated by a damage limitation provision), where a plaintiff’s lost profits are foreseeable and arise naturally from a breach of contract, the damages will be considered general, direct damages that can survive a limitation of damages provision.

Pontiac GTO Buyer Gets Only Paltry Damage Award Where He Can’t Prove Lost Profits Against Repair Shop – IL Court

Spagnoli v. Collision Centers of America, Inc., 2017 IL App (2d) 160606-U portrays a plaintiff’s Pyrrhic victory in a valuation dispute involving a 1966 Pontiac GTO.  

The plaintiff car enthusiast brought a flurry of tort claims against the repair shop defendant when it allegedly lost the car’s guts after plaintiff bought it on-line.

The trial court directed a verdict for the defendant on the bulk of plaintiff’s claims and awarded the plaintiff only $10,000 on its breach of contract claim – a mere fraction of what the plaintiff sought.

The Court first rejected plaintiff’s lost profits claim based on the amounts he expected to earn through the sale of car once it was repaired.

A plaintiff in a breach of contract action can recover lost profits where (1) it proves the loss with a reasonable degree of certainty; (2) the defendant’s wrongful act resulted in the loss, and (3) the profits were reasonably within the contemplation of the defendant at the time the contract was entered into.

Because lost profits are naturally prospective, they will always be uncertain to some extent and impossible to gauge with mathematical precision.  Still, a plaintiff’s damages evidence must afford a reasonable basis for the computation of damages and the defendant’s breach must be traceable to specific damages sustained by the plaintiff.  Where lost profits result from several causes, the plaintiff must show the defendant’s breach caused a specific (measurable) portion of the lost profits. [¶¶ 17-20]

Agreeing with the trial court, the appeals Court found the plaintiff failed to present sufficient proof of lost profits.  The court noted that the litigants’ competing experts both valued the GTO at $80,000 to $115,000 if fully restored to mint condition.  However, this required the VIN numbers on the vehicle motor and firewall to match and the engine to be intact.  Since the car in question lacked matching VIN numbers and its engine missing, the car could never be restored to a six-figures value range.

The Court also affirmed the directed verdict for defendant on plaintiff’s consumer fraud claim.  To make out  valid Consumer Fraud Act (CFA) claim under the Consumer Fraud Act a plaintiff must prove: (1) a deceptive act or unfair practice occurred, (2) the defendant intended for the plaintiff to rely on the deception, (3) the deception occurred in the course of conduct involving trade or commerce, (4) the plaintiff sustained actual damages, and (5) the damages were proximately cause by the defendant’s deceptive act or unfair conduct. A CFA violation can be based on an innocent or negligent misrepresentation.

Since the plaintiff presented no evidence that the repair shop made a misrepresentation or that defendant intended that plaintiff rely on any misrepresentation, plaintiff did not offer a viable CFA claim.

Bullet-points:

  • A plaintiff in a breach of contract case is the burdened party: it must show that it is more likely than not that the parties entered into an enforceable contract – one that contains an offer, acceptance and consideration – that plaintiff substantially performed its obligations, that defendant breached and that plaintiff suffered money damages flowing from the defendant’s breach.
  • In the context of lost profits damages, this case amply illustrates the evidentiary hurdles faced by a plaintiff.  Not only must the plaintiff prove that the lost profits were within the reasonable contemplation of the parties, he must also establish which profits he lost specifically attributable to the defendant’s conduct.
  • In consumer fraud litigation, the plaintiff typically must prove a defendant’s factual misstatement.  Without evidence of a defendant’s misrepresentation, the plaintiff likely won’t be able to meet its burden of proof on the CFA’s deceptive act or unfair practice element.

Medical Device Maker Can Recover Lost Profits Against Double-Dipping Salesman – IL Fed. Court

A Federal court examines the pleading and proof elements of several business torts in a medical device company’s lawsuit against its former salesman and a rival firm.  The plaintiff sued when it learned its former employee was selling on the side for a competitor.

Granting summary judgment for most of the plaintiff’s claims, the Court in HSI v. Pappas, 2016 WL 5341804, dives deep into the various employer remedies where an employee surreptitiously works for a competing firm.

The Court upheld the plaintiff’s breach of fiduciary duty claim against the former salesman as well as its aiding and abetting (the breach) claim against the competitor.  In Illinois, a breach of fiduciary duty plaintiff must show (1) existence of a fiduciary duty, (2) the fiduciary duty was breached, and (3) the breach proximately caused plaintiff’s injury.  An employee owes his employer a duty of loyalty.  (Foodcomm Int’l v. Barry, 328 F.3d 300 (7th Cir. 2003).

A third party who aids and abets another’s breach of fiduciary duty can also be liable where the third party (1) knowingly participates in or (2) knowingly accepts the benefits resulting from a breach of fiduciary duty.encourages or induces someone’s breach of duty to his employer.

Since the plaintiff proved that the ex-salesman breached his duty of loyalty by secretly selling for the medical supply rival, the plaintiff sufficiently made out a breach of fiduciary duty claim against the salesman.  The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still reaped the benefits of his dual services.  The competitor’s agent admitted in his deposition that he knew the salesman was employed by plaintiff yet continued to make several sales calls with the plaintiff to customers of the competitor.  The court found these admissions sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

The plaintiff also produced evidence that the competitor knew the salesman was employed by the plaintiff and still profited from his dual services.  The competitor’s representative admitted in his deposition knowing the salesman was employed by plaintiff yet still made several sales calls with the salesman to some of the competitor’s customers.  The court found this admission sufficient evidence that the competitor encouraged the salesman’s breach of his duties to the plaintiff.

With liability against the individual and corporate defendants established, the Court turned its attention to plaintiff’s damages.  Plaintiff sought over $400K in damages which included all amounts plaintiff paid to the defendant during his 10-month employment tenure, the amounts paid by the competitor to the defendant during his time with plaintiff as well as lost profits

An employee who breaches his fiduciary duties to an employer generally must forfeit compensation he receives from the employer.  The breaching employee must also disgorge any profits he gains that flow from the breach.

This is because under basic agency law, an agent is entitled to compensation only on the “due and faithful performance of all his duties to his principal.”  The forfeiture rule is equitable and based on public policy considerations.

Since the evidence was clear that the defendant failed to perform his employment duties in good faith, the Court allowed the plaintiff to recoup the nearly $180K in compensation it paid the defendant.

The plaintiff was not allowed to recover this amount from the competitor, however.  The Court held that since the payments to the salesman never came into the competitor’s possession, plaintiff would get a windfall if it could recover the same $180K from the competitor.

The Court also allowed the plaintiff to recover its lost profits from both the individual and corporate defendants.  In Illinois, lost profits are inherently speculative but are allowable where the evidence affords a reasonable basis for their computation, and the profits can be traced with reasonable certainty to the defendant’s wrongful conduct.

Since the corporate defendant didn’t challenge plaintiff’s projected profits proof, the Court credited this evidence and entered summary judgment for the plaintiff.

Take-aways:

This case serves as a vivid cautionary tale as to what lies ahead for double-dealing employees.  Not only can the employer claw back compensation paid to the employee but it can also impute lost profits damages to the new employer/competitor where it induces a breach or willingly accepts the financial fruits of the breach.

The case also cements proposition that lost profits are intrinsically speculative and that mathematical certainty isn’t required to prove them.